Most boys don't retract until puberty, sometimes later, sometimes never (which is only a problem if it is uncomfortable for him). If he's still in diapers, I doubt he's of an age where this is something to pay any mind to. The hole is supposed to be quite small. It should close tightly over the head of the penis, and relax a bit when he urinates. This is a good thing. It protects his penis. As long as he can urinate, he's fine. What is they say? If he can pee, let it be? Something like that.
As for the irritated foreskin, I really wouldn't worry. It's likely just mild irritation from a wet diaper. You say it has been like that since his first diaper change of the day? More than likely he's had urine held against the skin for a good bit of time while he slept. The foreskin can get a diaper rash just like any other part of the diaper area. Depending on how irritated it is, I'd either let him go diaper free for a bit, or apply a little olive or coconut oil and then let him go diaper free.